I would like to bring your attention to an issue that could help many student loan borrowers concerning loan debt and tax relief. There is a new federal repayment plan, available as of July 1, 2009, called the Income-Based Repayment (IBR) plan (see #2 below). After 25 years of payments (in any job) all remaining debt - including interest – will be forgiven. Many borrowers will pay off their debt before then, but under current law, if there is any balance to forgive after 25 years, the amount forgiven would be taxed as income to the borrower. This is not rational! It does not make sense that a borrower could financially handle paying a tax bill (on what could possibly be a significant amount forgiven) after 25 years of eligibility under this reduced payment plan.
A bipartisan bill in the U.S. House of Representatives, H.R. 2492, would prevent the taxation of debt forgiven through IBR. Loan forgiveness is supposed to wipe the slate clean for responsible borrowers, not create a new financial obligation. Current law exempts some kinds of loan forgiveness from taxation, including the federal 120 payment Public Service Loan Forgiveness program and public interest loan forgiveness plans through schools, but not IBR.
Please take a moment to write to your representative and urge them to support H.R. 2492 and ensure there's really a light at the end of the tunnel for responsible borrowers.
Lower your monthly payments! IBR became available July 1 this year. Your federal student loans may be with Direct Loans (such as offered at Seattle University School of Law) or FFELP (e.g. Graduate Leverage, Access Group, Key, etc.) and you may hold any type of job. After 25 years of eligible payments, the Department of Education will forgive any outstanding loan principal and interest. At this time the canceled amount is taxable which is why we have been working hard for tax relief with HR 2492 – see #1 above.
If you are working in a public interest job, after 120 on-time eligible payments (through IBR [recommended] Income Contingent or Standard 10 year plan) the balance of your federal loans may be forgiven and the amount will not be taxed. The payments do not have to be consecutive. However, the loans must be with Direct Loans for this federal public interest loan forgiveness program and you may reconsolidate into Direct Loans for this purpose (see www.loanconsolidation.ed.gov). If you have a good incentive program with your current lender and depending on your debt load, you should consider whether it is worth switching to Direct Loans. It is your responsibility to keep documentation of eligible employment and payments. A public service job is defined as a full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education, social work, public interest law services, child care, public library sciences, or any other job at an organization that is described in section 501(C)(3) of the Internal Revenue Code of 1986.
IBR looks at your adjusted gross income, family size and loan debt. You must be eligible for a partial economic hardship but it is not that difficult to qualify. Loan payments will be limited to 15 percent of a borrower's discretionary income or 15 percent of the amount that a borrower's (and spouse's if applicable) adjusted gross income exceeds 150 percent of the poverty line, divided by 12. For the 2009 Federal Poverty Guidelines see http://aspe.hhs.gov/poverty/09poverty.shtml. A spouse's income will not be considered if a married couple files separate tax returns – however, you lose some tax benefits by filing separately.
Parent PLUS loans made on behalf of a dependent student, consolidation loans that contain parent PLUS loans, defaulted loans and private student loans are not eligible for IBR. The federal Graduate PLUS, Stafford and Perkins (although Perkins has other cancelation options that should be considered) loans do count.
Unpaid interest and principal are capitalized and any outstanding loan balance is forgiven after 25 years of eligible repayment (or after 120 eligible monthly payments for public interest). If a borrower leaves the program, the maximum payment required on the loan shall not exceed the monthly amount based on a 10-year repayment period when the borrower first joined IBR. The time the borrower is permitted to repay the loan may exceed 10 years.
Two excellent resources with more information and IBR calculators may be found at www.ibrinfo.org and www.equaljustice.org.
Equal Justice Works (EJW), an organization of public service lawyers, presented a series of webinars in July and August called Getting Your Student Loans Forgiven: How government and nonprofit employees can earn public service loan forgiveness. The webinar targeted anyone with high student loan debt who is on a career in or currently working for the government or a nonprofit to explain how you can benefit from the College Cost Reduction and Access Act, the most significant law affecting public service in a generation.
View the materials from the webinar. Highlights include:
- How to qualify for Public Service Loan Forgiveness
- How the new Income-Based Repayment plan works
- How to figure out how much you can benefit